Will home equity loans become more expensive in 2023?
They could – and could also be more difficult to qualify for.
- Taking out home equity loans can be an inexpensive way to get a loan.
- With borrowing costs likely to rise over the next year, home equity loans could become more expensive.
- As home values fall and homeowners lose equity, it could also become more difficult to qualify for a home equity loan.
Owning a home has many advantages. Not only do you get the stability of predictable monthly mortgage payments (assuming you have a fixed-rate loan), but you can make your own rules instead of having to listen to a landlord.
Owning a home also means you can borrow against the equity you have built up in it. Home equity is defined as the market value of your property minus your mortgage balance. For example, if your home could sell for $500,000 and you owe $200,000 on your mortgage, you are left with $300,000 in equity.
Right now, homeowners are sitting at a high level of equity as property values are rising nationally. You might think it’s a good idea to lend money to your home, whether it’s to fund a renovation, go on vacation, or for some other reason.
But while home equity loans can be affordable, there’s a good chance they’ll get more expensive in 2023. Here’s why.
Lending rates could rise across the board
US consumers have been struggling with inflation since the end of 2021. And the Federal Reserve is trying to step in and do something about it — namely, by speeding up interest rate hikes.
The logic is that when borrowing becomes more expensive, consumers spend less. Once that happens, supply chains should be able to keep up with consumer demand and prices should return to more moderate levels.
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While the Fed may have good intentions, an undesirable consequence of continued rate hikes is that borrowing could become unaffordable for consumers. And while you’ll generally pay less interest on a home equity loan than, say, a credit card balance, if interest rates across the board rise next year, a home equity loan could cost more than you expected. So it’s fair to say that 2023 may not be the best year to borrow against your home.
Qualifying could be more difficult
In general, home equity loans are fairly easy to qualify if the equity is in your home. But when property values start falling (which will likely happen in 2023), equity levels will likely fall. And that doesn’t mean you’re going to stick with it no Equity when that happens you could end up with a lot less.
So if you’re serious about taking out a home loan, do it sooner rather than later. If you wait too long, you may find that a home equity loan is less affordable. Also, you may find that you cannot borrow as much as you would like because your equity level has fallen.
But you also don’t want to rush into a home equity loan. If you borrow too much, to the point where you can no longer make your payments, you risk losing your home. And that’s a really terrible consequence that you want to avoid.
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Mortgage rates are at their highest levels in years – and are expected to rise further. It’s more important than ever to check your interest rates with multiple lenders to get the best interest rate possible while minimizing fees. Even a small difference in your plan could save hundreds off your monthly payment.
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